Evergy, Inc. quarterly report, Q2 FY2020

Evergy, Inc. — Q2 2020 Form 10-Q

Reporting period: Three and six months ended June 30, 2020. Evergy is a regulated electric utility holding company serving approximately 1.6 million customers in Kansas and Missouri, with about 14,700 MW of owned generation capacity and renewable power purchase agreements. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.

Financial performance and position

Metric	Q2 2020	Q2 2019	First half 2020	First half 2019
Operating revenue	$1,184.7	$1,221.7	$2,301.4	$2,438.6
Income from operations	$271.7	$271.7	$469.2	$481.3
Net income attributable to Evergy	$133.4	$139.7	$202.8	$239.2
Diluted EPS	$0.59	$0.57	$0.89	$0.96
Operating cash flow	Not separately reported	Not separately reported	$522.5	$633.7

• Q2 operating income was unchanged year over year despite lower revenue; first-half operating income fell $12.1 million. First-half utility gross margin, a company-defined non-GAAP measure, was $1,653.4 million, down $37.3 million.
• First-half net income declined $36.4 million. Adjusted earnings, a non-GAAP measure, were $154.2 million, or $0.68 per diluted share, in Q2 and $248.4 million, or $1.09 per diluted share, for the first half. These exclude specified items, including advisor and severance costs and the Kansas tax revaluation.
• Cash used in investing was $601.2 million in the first half, including $635.6 million of property, plant and equipment additions. Cash from financing was $231.7 million; dividends paid were $229.0 million.
• At June 30, cash and cash equivalents were $176.2 million; total assets were $26.25 billion and total equity was $8.53 billion. Long-term debt book value, including current maturities, was $9.632 billion; short-term notes and commercial paper were $467.0 million, with $297.0 million of collateralized borrowings.
• Evergy reported $2.003 billion of available borrowing capacity under its $2.5 billion master credit facility and compliance with its debt covenants. The facility requires a total indebtedness-to-capitalization ratio no greater than 0.65 to 1.00.

Material changes and drivers

• COVID-19 reduced commercial and industrial demand and shifted usage toward residential customers. First-half retail MWh sales fell 887 thousand, including decreases of 698 thousand commercial and 258 thousand industrial MWh, partly offset by increased residential usage. Management attributed lower cash receipts and much of the margin decline to these conditions.
• Operating and maintenance expense declined $34.6 million in the first half, principally reflecting lower generation and transmission/distribution costs, partly offset by $16.4 million of strategic-planning advisor costs and $11.4 million of voluntary severance costs. Depreciation rose $11.1 million and interest expense rose $9.2 million.
• Kansas House Bill 2585 exempts qualifying utilities from Kansas corporate income tax beginning in 2021. Revaluation of deferred tax balances contributed $13.8 million of Evergy income tax expense not expected to be recovered from customers. At Evergy Kansas Central, the tax revaluation drove first-half income tax expense to $126.7 million from $20.4 million and contributed to a Q2 net loss attributable to the subsidiary of $40.5 million; Evergy consolidated remained profitable.
• Evergy issued $500 million of 3.45% Kansas Central first mortgage bonds due 2050 and redeemed $250 million of 5.10% bonds. Metro issued $400 million of 2.25% mortgage bonds due 2030, using proceeds partly to repay credit-facility borrowings.

Outlook, commentary and risks

• In August, Evergy announced a five-year Sustainability Transformation Plan, including a target to reduce operating and maintenance expense by approximately $330 million by 2024 versus 2018 adjusted expense, reduce fuel and purchased-power expense by approximately $145 million between 2019 and 2024, and invest approximately $8.9 billion in base capital through 2024. The plan projects capital expenditures of $1.586 billion in 2020 and $1.726 billion in 2021; the plan is subject to review and change.
• The plan targets an 80% reduction in carbon emissions from 2005 levels by 2050; management said the plan could support an 85% reduction by 2030. Decarbonization timing depends in part on regulatory recovery and resource-planning processes.
• The Kansas Corporation Commission approved an accounting authority order in July allowing Kansas Central and Metro to defer net incremental COVID-19 costs for consideration in future rate cases, expected by the end of 2023. Recovery of lost revenues may also be considered. A Missouri commission decision on a similar request was expected in Q4 2020.
• Management estimated a 1% demand change would affect 2020 earnings by approximately $10 million for residential customers, $8 million for commercial customers and $2 million for industrial customers. Continued sales weakness, customer payment delays or nonpayment could increase credit losses and pressure cash flows, including by requiring repayment of receivables-facility borrowings.
• Evergy’s receivable-sale facilities expire in September 2020; the companies expected to renew them for at least one year. Other material uncertainties include regulatory recovery and rate matters, environmental compliance costs, the Hawthorn Station water-discharge permit, and potential supply-chain, operational and cybersecurity effects from the pandemic.
• The board declared a quarterly dividend of $0.505 per share in August, payable September 21, 2020. The share-repurchase program concluded in July 2020.

Key investor verification points

• Confirm subsequent COVID-19 effects on class-level demand, customer collections, credit-loss expense, operating cash flow and receivables-facility capacity.
• Track regulatory decisions on COVID-19 cost and lost-revenue recovery, Kansas tax-related rate reductions, and Missouri rate proceedings, including the Sibley Station customer-refund exposure.
• Assess execution, funding and regulatory recovery for the $8.9 billion capital plan, and the assumptions behind the emissions and cost-reduction targets.
• Review debt maturities, borrowing capacity, covenant headroom and refinancing or renewal of the receivable-sale facilities.
• Evaluate environmental and legal contingencies, including coal-ash requirements, water permits and nuclear spent-fuel storage; outcomes and potential costs may change.